Buy United Phosphorus - Target Price of Rs. 185 - Prabhudas Lilladher

Higher share of revenues from high growth markets: UPL generates ~60%

of its revenues collectively from high growth markets of Asia Pacific & Latin America, which is the highest, compared to the likes of global giants Syngenta (42%), MAI (40%) and Nufarm (56%). Higher exposure to these emerging economies positions UPL well to ride the next growth boom in these markets which are growing at a higher rate of 10-12% annually compared to global agrochemicals market growth rate of 4-5%.


EBITDA margins likely to improve driven by turnaround in DVA, shift in product mix: We expect UPL's EBITDA margins to improve by 50bps over the next two years to 18.5%. EBITDA margin improvement is likely to be driven by shift in product mix, rationalization of costs and turnaround of DVA. We expect DVA Agro's margins to improve by 200-250bps over the medium term driven by consolidation of supply chain in Latin America, improved product profile and better customer mix.

Working Capital improved in FY13 contrary to expectations of deterioration: Despite increasing contribution from Brazil & unfavorable weather conditions during FY13, net working capital improved to 89 days compared to 112 days in FY12. Improvement in working capital was led by re-negotiation of higher creditors days, tightening of debtors and reduction in inventory. We expect working capital to remain around 100 days going forward.

Earnings growth, combined with improvement in return ratios, to trigger re-rating: We expect UPL to register 12.0%/13% CAGR in revenues/PAT over FY13E-15E. We expect ROCE to improve by ~50bps to 13.1% by FY15E. Sustainable earnings growth, DVA turnaround and improvement in working capital are likely to re-rate the stock. At CMP, UPL trades at 7.8x FY14E earnings which is a discount of ~30% to industry average and 20% discount to its 3-year average. We recommend 'BUY' with target price of Rs 185.

Source : Equity Bulls

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